University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

400

Pages:

2
Author:

stud_ice13

Payback Period (QS 24-1 to QS 24-4) 1. QS 24-1: Payback Period with Equal Cash Flows o Investment: $27,000 o Annual Net Cash Flow: $9,000 o Payback Period: $27,000 / $9,000 = 3 years 2. QS 24-2: Payback Period with Equal Cash Flows o Investment: $280,000 o Annual Net Cash Flow: $70,000 o Payback Period: $280,000 / $70,000 = 4 years 3. QS 24-3: Analyzing Payback Periods o (a) Preferred Investment: Investment A (3.5 years vs. 4 years for Investment B) o (b) Will a shorter payback period always be chosen? Not necessarily, as other factors like overall profitability (NPV) and return rate (IRR) are also important considerations. 4. QS 24-4: Payback Period with Unequal Cash Flows o Compute the cumulative net cash flows year-by-year until reaching or exceeding the initial investment. The payback period occurs in the year when cumulative cash flows turn positive. Accounting Rate of Return (ARR) (QS 24-5 to QS 24-7) 5. QS 24-5: Interpreting ARR o Choose the project with the highest ARR if only one can be selected. 6. QS 24-6: ARR Calculation for Project A o Initial Investment: $280,000 o Annual Income: $20,000 o Average Investment: ($280,000 + $30,000 salvage value) / 2 = $155,000 o ARR: $20,000 / $155,000 = 12.9% 7. QS 24-7: ARR Calculation for Peng Company’s Machine o Machine Cost: $45,000, Salvage Value: $6,000 o Average Investment: ($45,000 + $6,000) / 2 = $25,500 o Annual Income: $1,950 o ARR: $1,950 / $25,500 = 7.65% Net Present Value (NPV) (QS 24-8 to QS 24-20) 8. QS 24-8 and QS 24-9: NPV Analysis without Calculations o (a) Accept All Positive NPVs: Accept any project with NPV > 0. (b) Choose One Project: Select the project with the highest NPV if limited to one choice. 9. QS 24-10: NPV of an Annuity (PV Factor Given) o Initial Investment: $60,000, Annual Cash Flow: $16,000, Years: 6, Discount Rate: 9%, Annuity PV Factor: 4.4859. o NPV: $16,000 × 4.4859 - $60,000 = $71,774 - $60,000 = $11,774 o Decision: Accept, as NPV is positive. 10. QS 24-12: NPV with Salvage Value o Calculate the NPV for both machines, including the discounted salvage value, then choose the machine with the higher NPV. 11. QS 24-13: Profitability Index Analysis (No Calculations) o (a) Accept Projects with Profitability Index > 1.0 o (b) Choose One Project: Select the project with the highest profitability index. 12. QS 24-14: NPV of Annuity (Discount Rate Given) o Initial Investment: $27,000, Annual Cash Flow: $9,000, Years: 4, Discount Rate: 10%. o Find the NPV by multiplying the cash flow by the annuity factor, then subtracting the initial investment. o Internal Rate of Return (IRR) (QS 24-21 to QS 24-23) 21. QS 24-21: IRR Decision Rule (No Calculations) o (a) Accept Projects with IRR > Required Rate of Return o (b) Choose One Project: Select the project with the highest IRR if limited to one. 22. QS 24-22: IRR Calculation for New Machine o Find the IRR by locating the discount rate that sets NPV to zero, often done using a financial calculator or software. 23. QS 24-23: IRR Calculation with Hurdle Rate o (a) Calculate IRR for the cash flow pattern and compare it to the hurdle rate. o (b) Decision: Invest if IRR exceeds the hurdle rate. Break-Even Time (QS 24-24) 24. QS 24-24: Break-Even Time o Calculate the cumulative present values of cash flows, year-by-year, to find when they equal the initial investment amount.